September 24, 2016

Unemployment ― the toughest challenge for economics students

Comment on Maria Alejandra Madi on ‘How unemployment has been considered by mainstream macroeconomic models?’


Maria Alejandra Madi tells the history of employment theory since the 1950s and recounts the various recommendations given by economists. This is counterproductive. For a heterodox student, it goes without saying that orthodox economics is dead. Hence, there is NO need to reiterate false theories, the only topic of interest is the TRUE employment theory. The students of physics nowadays do not waste much time with the study of the Geo-centric model or other obsolete theories. Students want to learn the true theory.

With regard to employment theory it is important to note the following:
  • IS-LM is refuted and as dead as a doornail (2014),
  • the (bastard) Phillips curve is refuted and as dead as a doornail (2012),
  • the correct employment theory is already part of the curriculum of Constructive Heterodoxy (2015).*
In the following, a sketch of the formally and empirically correct employment theory is given. A rather elementary version of the objective structural employment equation is shown on Wikimedia.

From this equation follows inter alia:
(i) An increase of the expenditure ratio rhoE leads to higher employment (the letter rho stands for ratio). An expenditure ratio rhoE greater than 1 indicates credit expansion, a ratio rhoE less than 1 indicates credit contraction.
(ii) Increasing investment expenditures I exert a positive influence on employment, a slowdown of growth does the opposite.
(iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.

The complete AND testable employment equation is a bit longer and contains in addition profit distribution, public deficit spending, and import/export.

Items (i) and (ii) cover Keynes’s arguments about the role of aggregate demand, which have been commonsensically right but formally defective. More precisely, Keynes’s multiplier is provable false. The factor cost ratio rhoF as defined in (iii) embodies the price mechanism which works very different from what the representative economist falsely assumes. As a matter of fact, overall employment (in the world economy or a closed national economy) INCREASES if the average wage rate W INCREASES relative to average price P and productivity R.

So, in simple terms, full employment (in any definition) can be achieved by increasing overall demand (expenditure ratio, investment expenditures etc.) or by INCREASING the average wage rate or by a combination of the two.

Both, the Walrasian and Keynesian approaches have produced misleading policy advice. Unemployment is ultimately the result of theory failure, that is, of the utter scientific incompetence of economists ― more precisely of orthodox AND heterodox economists.

By again and again recycling theories that have already been refuted, the pedagogy blog is treading water, keeps students away from the cutting edge of research, and ultimately hampers an effective employment policy.

Egmont Kakarot-Handtke

Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2014). Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Employment. SSRN Working Paper Series, 2576867: 1–11. URL

* See cross-references New curriculum